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The Impossibility of Auditor Independence

July 15, 1997 | Max H. Bazerman , Kimberly P. Morgan , George F. Loewenstein | Strategy

The growing number of audit failures leads the authors to question the current auditing relationship. In no profession is impartiality more important than in auditing, they say. Yet psychological research indicates that such impartiality is impossible under current institutional arrangements.

An audit is meant to ensure that a company's financial statement is valid, reliable, and complete. The auditor gives an unqualified opinion that the statement "fairly presents" the company's financial position. But the management of the company hires and pays the outside auditor; the company and its managers become the auditor's "client," thus making psychological independence impossible.

Bazerman et al. examine a series of experiments on self-serving bias, in which bias entered unconsciously and unintentionally while subjects made supposedly impartial judgments. In the auditing relationship, certain characteristics exacerbate self-serving bias, causing auditors' judgments to favor their clients:

1. People tend to be less concerned about harming a statistical victim than a known victim. An auditor doesn't really know who will be harmed by misinformation, but he or she does know the people in the firm who would be harmed by a negative audit.

2. The negative consequences of a negative opinion on an audit are immediate, i.e., loss of contract or employment.

3. Auditors have long-standing relationships with the companies they audit.

4. Reporting standards are flexible or ambiguous.

5. People can mislead themselves about the nature of trade-offs and rationalize their behavior.

Other factors add to the pressure on auditors such as the increased competition among accounting firms and the growth of consulting firms that also provide auditing services. An unfavorable audit risks not only the auditing relationship but the consulting one as well.

Bazerman et al. call for reform of auditing's current structure to end the current epidemic of litigation.

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